INTRODUCTION TO ACCOUNTING

Sanisah Hanim Jiman


1.1 What is accounting?

What do you think of when you read or hear the word, ‘accounting’? What do you believe it means
or represents? If you have already attended some accounting classes or if you have spoken to someone who knows something about accounting, you will probably have a fairly good idea of what accounting is and what it is used for. If not, you may find it useful to have this knowledge before you start studying the subject.
Accounting can be defined as: The process of identifying, measuring, and communicating economic information to permit informed judgement and decisions by users of that information.
What is accounting?

1.2 History of Accounting

 Accounting began because people needed to:
 record business transactions; and know how much they owed others and how much others owed them. It is known to have existed in one form or another for at least 10,000 years. (Records exist
which indicate its use at that time in Mesopotamia – modern-day Iraq.) There is also considerable
evidence of accounting being practised in ancient times in Egypt, China, India, Greece and Rome.
In England, the ‘Pipe Roll’, the oldest surviving accounting record in the English language, contains
an annual description of rents, fines and taxes due to the King of England, from 1130 to 1830.

Before a formal system like double entry bookkeeping could be developed and that all seven
existed when Pacioli wrote his treatise:
  • Private property. The power to change ownership exists and there is a need to record the transaction.
  • Capital. Wealth is productively employed such that transactions are sufficiently important to make their recording worthwhile and cost-effective.
  • Commerce. The exchange of goods on a widespread level. The volume of transactions needs to be sufficiently high to motivate someone to devise a formal, organised system that could be applied universally to record transactions.
  •  Credit. The present use of future goods. Cash transactions, where money is exchanged for goods, do not require that any details be recorded of who the customer or supplier was. The existence of a system of buying and selling on time (i.e. paying later for goods and services purchased today) led to the need for a formal organised system that could be applied universally to record credit transactions of this type.
  • Writing. A mechanism for making a permanent record in a common language. Writing had clearly been around for a long time prior to Pacioli but it was, nevertheless, an essential element required before accounting could be formalised.
  • Money. There needs to be a common denominator for exchange. So long as barter was used rather than payment with currency, there was no need for a bookkeeping system based upon transactions undertaken using a uniform set of monetary values.
  •  Arithmetic. As with writing, this has clearly been in existence far longer than accounting. Nevertheless, it is clearly the case that without an ability to perform simple arithmetic, there was no possibility that a formal organised system of accounting could be devised.

The larger the business, the greater the number of entries that were made. They were prepared
when they occurred and it could be some time before the next transaction with the same person
occurred. Even with these records in a Ricordanze, it became difficult to tell what total amounts
were owed and due. To address this problem, merchants started transferring details from the Ricordanze into another book and entries in that book were organised into what we now call ‘accounts’, one for each person or item.

This was the beginning of the system of double entry bookkeeping described by Pacioli. In his
system, a book called a Memorandum replaced the Ricordanze. The details recorded in it were
abbreviated, organised and transferred into another book called a Journal. Details from that book
were then further summarised and entered into accounts maintained in a third book called a
Ledger.

ACCOUNTING REVOLUTION


1.3 Users of accounting information

Possible users of financial accounting information include:
  • Managers. These are the day-to-day decision-makers. They need to know how well things are progressing financially and about the financial status of the business.
  • Owner(s) of the business. They want to be able to see whether or not the business is profitable.In addition they want to know what the financial resources of the business are.
  •  A prospective buyer. When the owner wants to sell a business the buyer will want to see such information.
  • The bank. If the owner wants to borrow money for use in the business, then the bank will need such information.
  • Tax inspectors. T hey need it to be able to calculate the taxes payable.
  • A prospective partner. If the owner wants to share ownership with someone else, then the would-be partner will want such information.
  • Investors, either existing ones or potential ones. They want to know whether or not to invest their money in the business.
  • Creditors. T hey want to know if there is any risk of not being paid what they are due.
Users of accounting information

1.4 Differences Between Accounting and Bookkeeping

Bookkeeping and accounting are two functions which are extremely important for every business organization. In the simplest of terms, bookkeeping is responsible for the recording of financial transactions whereas accounting is responsible for interpreting, classifying, analyzing, reporting, and summarizing the financial data.
Bookkeeping and accounting may appear to be the same profession to an untrained eye. This is because both accounting and bookkeeping deal with financial data, require basic accounting knowledge, and classify and generate reports using the financial transactions. 

1.5 Branches of Accounting
  • Financial Accounting: Financial accounting involves recording and categorizing transactions for business. This data is generally historical, meaning it’s from the past. It also involves generating financial statements based on these transactions. All financial statements, such a balance sheet and income statement, must be prepared according to the Generally Accepting Accounting Principles (GAAP) and Malaysian Financial Reporting Standard (MFRS)
  • Managerial Accounting: Also known as management accounting, this type of accounting provides data about a company’s operations to managers. The focus of managerial accounting is to provide data that managers need to make decisions about a business’s operations, not comply strictly with GAAP.Managerial accounting includes budgeting and forecasting, cost analysis, financial analysis, reviewing past business decisions and more.
  • Auditing: There are two types of auditing: external and internal auditing. In external auditing, an independent third party reviews a company’s financial statements to make sure they are presented correctly and comply with GAAP. Internal auditing involves evaluating how a business divides up accounting duties, who is authorized to do what accounting task and what procedures and policies are in place. Internal auditing helps a business zero in on fraud, mismanagement and waste or identify and control any potential weaknesses in its policies or procedures, according to accounting tools.
  • Tax accounting:  involves planning for tax time and the preparation of tax returns. This branch of accounting aides businesses be compliant with regulations set up by the IRS.Tax accounting also helps businesses figure out their income tax and other taxes and how to legally reduce their amount of tax owing. Tax accounting also analyzes tax-related business decisions and any other issues related to taxes.
1.6 Types of business ownership
  • Sole Proprietorship:The simplest and most common form of business ownership, sole proprietorship is a business owned and run by someone for their own benefit. The business’ existence is entirely dependent on the owner’s decisions, so when the owner dies, so does the business.
  • Partnership:These come in two types: general and limited. In general partnerships, both owners invest their money, property, labor, etc. to the business and are both 100% liable for business debts. In other words, even if you invest a little into a general partnership, you are still potentially responsible for all its debt. General partnerships do not require a formal agreement partnerships can be verbal or even implied between the two business owners. Limited partnerships require a formal agreement between the partners. They must also file a certificate of partnership with the state. Limited partnerships allow partners to limit their own liability for business debts according to their portion of ownership or investment.
  • Corporation: Corporations are, for tax purposes, separate entities and are considered a legal person. This means, among other things, that the profits generated by a corporation are taxed as the “personal income” of the company. Then, any income distributed to the shareholders as dividends or profits are taxed again as the personal income of the owners.
  • Limited Liability Company (LLC):Similar to a limited partnership, an LLC provides owners with limited liability while providing some of the income advantages of a partnership. Essentially, the advantages of partnerships and corporations are combined in an LLC, mitigating some of the disadvantages of each.
1.7 Types of business activities
  • Service company is a business entity that provides services to the public and does not sell a product. This group includes accounting firms, law firms, dry cleaning establishments and etc.

  • Merchandising companies are business entities selling a product and possibly a service to the public. A merchandising company purchases the products to be sold from outside vendors.Merchandising companies include auto dealerships, clothing stores, supermarkets and etc.
  • Manufacturing companies are business entities selling a product to the public that is made by the company using raw materials, direct labor and overhead.Manufacturing companies include steel mills, auto manufacturers, clothing manufacturers and etc.
How Do Service, Merchandise and Manufacturing Company Differ (Part1)


                    How Do Service, Merchandise and Manufacturing Company Differ (Part 2)

1.8 Types of Financial Statements

Financial Statements provide a picture of the performance, financial position financial position, and cash flows of a business. These documents are used by the investment community, lenders, creditors, and management to evaluate an entity. There are four main types of financial statements, which are as follows:
  • Statement of Profit or Loss /Income Statement. This report reveals the financial performance of an organization for the entire reporting period. It begins with sales, and then subtracts out all expenses incurred during the period to arrive at a net profit or loss. An earnings per share figure may also be added if the financial statements are being issued by a publicly-held company. This is usually considered the most important financial statement, since it describes performance.
  • Statement of Financial Position/Balance Sheet. This report shows the financial position of a business as of the report date (so it covers a specific point in time). The information is aggregated into the general classifications of assets, liabilities, and equity. Line items within the asset and liability classification are presented in their order of liquidity, so that the most liquid items are stated first. This is a key document, and so is included in most issuances of the financial statements.
  • Statement of Cash Flows. This report reveals the cash inflows and outflows experienced by an organization during the reporting period. These cash flows are broken down into three classifications, which are operating activities, investing activities, and financing activities. This document can be difficult to assemble, and so is more commonly issued only to outside parties.
  • Statement of Owner's Equity/ Changes in Equity. This report documents all changes in equity during the reporting period. These changes include the issuance or purchase of shares, dividends issued, and profits or losses. This document is not usually included when the financial statements are issued internally, as the information in it is not overly useful to the management team.
1.9 Accounting Bodies in Malaysia




1.10 Potential Career in Accounting





EVOLUTION OF A PROFESSION - 8,000 YEARS OF ACCOUNTING
THE FUTURE OF ACCOUNTING

Please surf these following links ....

What is Accounting and Why is it Important For Your Business?

 SLIDEPLAYER: INTRODUCTION TO ACCOUNTING

11 Users of Accounting Information

TOP 8 DIFFERENCES BETWEEN BOOKKEEPING AND ACCOUNTING

The 8 Branches of Accounting: Their Uses and How They Work

Malaysian Financial Reporting Standards (MFRSs)

ACCOUNTINGTOOLS.COM

The 4 Major Business Organization Forms


TYPES OF FINANCIAL STATEMENTS

CRITICAL THINKING IN FINANCE , ACCOUNTING, AND BUSINESS

THE FUTURE OF FINANCE

SAP FINANCE SOLUTIONS OVERVIEW


DIGITAL TRANSFORMATION: ARE YOU READY FOR EXPONENTIAL CHANGE?

"ENJOY LEARNING ACCOUNTING"
YOU MAY EXPLORE MORE VIA THIS LINK:
(40 VIDEOS:YOUTUBE)



Regards;
Sanisah Hanim Jiman

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